UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934

For the fiscal quarter ended March 31, 1998

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934

For the transition period from __ to __

Commission File Number: 0-23034

ENCAD-Registered Trademark-, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 95-3672088
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

6059 CORNERSTONE COURT WEST
SAN DIEGO, CA 92121
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (619) 452-0882

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __

The number of shares outstanding of the Registrant's Common Stock as of
March 31, 1998, was 11,555,846.

ENCAD, INC.

INDEX
PAGE
PART I - FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheets at
March 31, 1998 and December 31, 1997. . . . . . . . .3

Consolidated Statements of Income for the
three months ended March 31, 1998 and 1997 . . . . . .4

Consolidated Statements of Cash Flows for the
three months ended March 31, 1998 and 1997 . . . . . .5

Notes to Consolidated Financial Statements . . . . . .6

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . .8

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK. . . . . . . . . . . . . . . . . . . . . 15

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . 16

ITEM 2. CHANGES IN SECURITIES. . . . . . . . . . . . . . . . 16

ITEM 3. DEFAULTS UPON SENIOR SECURITIES. . . . . . . . . . . 16

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 16

ITEM 5. OTHER INFORMATION. . . . . . . . . . . . . . . . . . 16

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . 16

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . 17

PART I. - FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

ENCAD, Inc.

Consolidated Balance Sheets
(in thousands)

March 31, December 31,
1998 1997
-------------------------
(Unaudited) (Note)

ASSETS
Current Assets:
Cash and cash equivalents $ 193 $ 1,265
Accounts receivable - net 26,249 36,800
Inventories 32,361 29,155
Deferred income taxes 3,186 3,118
Prepaid expenses 2,705 1,780
-------- --------
Total current assets 64,694 72,118

Property - net 15,413 14,825
Other assets 3,905 3,352
-------- --------
Total Assets $ 84,012 $ 90,295
-------- --------
-------- --------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 7,810 $ 12,369
Accrued expenses and other liabilities 3,951 8,670
Borrowings under line of credit 5,910 3,261
-------- --------
Total current liabilities 17,671 24,300
-------- --------

Other Liabilities 1,659 1,273

Stockholders' Equity:
Common stock 12 12
Additional paid -in capital 18,263 17,577
Accumulated earnings 46,407 47,133
-------- --------
Total stockholders' equity 64,682 64,722
-------- --------
Total Liabilities and Stockholders' Equity $ 84,012 $ 90,295
-------- --------
-------- --------

Note: The balance sheet at December 31, 1997 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.

See Notes to Consolidated Financial Statements.

ENCAD, Inc.
Consolidated Statements of Income - Unaudited
(in thousands, except per share data)

Three months ended
March 31,
1998 1997
-------- --------

Net sales $ 23,517 $ 31,511
Cost of sales 14,619 16,105
-------- --------
Gross profit 8,898 15,406
-------- --------
Marketing and selling 5,768 5,114
Research and development 2,607 2,790
General and administrative 2,583 1,860
-------- --------
10,958 9,764
-------- --------
(Loss) income from operations (2,060) 5,642
Other income 999 -
Interest (expense) income - net (100) 64
-------- --------

(Loss) income before income taxes (1,161) 5,706
Provision for income taxes (435) 2,012
-------- --------
Net (loss) income $ (726) $ 3,694
-------- --------
-------- --------

(Loss) earnings per share - basic $ (0.06) $ 0.33
-------- --------

(Loss) earnings per share - diluted $ (0.06) $ 0.31
-------- --------
Weighted average common
shares outstanding - basic 11,528 11,331
-------- --------
Weighted average common and common
equivalent shares outstanding - diluted 11,528 12,028
-------- --------

See Notes to Consolidated Financial Statements.

ENCAD, Inc.
Consolidated Statements of Cash Flows - Unaudited
(in thousands)

Three months ended March 31,
1998 1997
-------- -------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (726) $ 3,694
Adjustments to reconcile net (loss) income to cash (used in) provided by
operating activities:
Depreciation and amortization 936 624
Tax benefit from exercise of stock options 247 311
Changes in assets and liabilities:
Accounts receivable 10,551 (3,642)
Inventories (3,206) (260)
Deferred income taxes (361) (143)
Prepaid expenses and other assets (1,185) (712)
Accounts payable (4,559) (365)
Accrued expenses and other liabilities (4,333) 1,076
-------- -------
Cash (used in) provided by operating activities (2,636) 583
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property (1,524) (2,042)
-------- -------
Cash used in investing activities (1,524) (2,042)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of Common Stock options and sale of stock under
employee stock purchase plan 439 205
Net borrowings under line of credit 2,649 -
-------- -------
Cash provided by financing activities 3,088 205
-------- -------
Net decrease in cash and cash equivalents (1,072) (1,254)
Cash and cash equivalents at beginning of period 1,265 6,949
-------- -------
Cash and cash equivalents at end of period $ 193 $ 5,695
-------- -------
-------- -------

Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 2,010 $ 105
-------- -------
-------- -------

See Notes to Consolidated Financial Statements.

ENCAD, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited

1) BASIS OF PRESENTATION - The accompanying consolidated financial statements
as of March 31, 1998 and for the three month periods ended March 31, 1998
and 1997 are unaudited and reflect all adjustments (consisting only of
normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial position and operating
results for the interim period. Theses consolidated financial statements
should be read in conjunction with the consolidated financial statements
and notes thereto, together with management's discussion and analysis of
financial condition and results of operations, contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997. The
results of operations for the interim periods are not necessarily
indicative of the results to be expected for any other interim period or
for the entire fiscal year.

The consolidated financial statements include the accounts of ENCAD, Inc.
and its wholly-owned subsidiaries (collectively the "Company"). All
intercompany transactions and balances are eliminated in consolidation.
Certain reclassifications have been made to amounts included in the prior
year's financial statements to conform with the financial statement
presentation for the quarter ended March 31, 1998.

The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect amounts reported in the consolidated financial
statements and related notes. Changes in those estimates may affect
amounts reported in future periods.

2) INVENTORIES:
(IN THOUSANDS)

MARCH 31, December 31,
1998 1997
-------- --------
Raw materials $ 14,381 $ 11,043
Work-in-process 146 629
Finished goods 17,834 17,483
-------- --------
Total $ 32,361 $ 29,155
-------- --------
-------- --------

3) EARNINGS PER SHARE - Statement of Financial Accounting Standards ("SFAS")
No. 128 "Earnings Per Share" was adopted by the Company in the fourth
quarter of 1997 and all earnings per share amounts previously reported have
been restated. Basic (loss) earnings per share is computed by dividing net
(loss) income by the weighted average common shares outstanding. Diluted
(loss) earnings per share is computed by dividing net (loss) income by the
weighted average number of common and common equivalent shares outstanding.
The effects of options to purchase stock were not included in the
computation of diluted loss per share for the quarter ended March 31, 1998
because the inclusion of such options would have been antidilutive. The
computation of diluted earnings per share for the quarter ended March 31,
1997 includes the effects of options, if dilutive, to purchase stock, which
aggregated 697,000.

4) COMPREHENSIVE INCOME - SFAS No. 130 "Reporting Comprehensive Income" was
adopted by the Company in the first quarter of 1998. There are no
material current differences between net income and comprehensive income,
and accordingly, no amounts have been reflected in the accompanying
consolidated financial statements.

5) STOCKHOLDER RIGHTS PLAN - In March 1998, the Company's Board of Directors
adopted a preferred stockholder rights plan which provides for a dividend
distribution of one preferred share purchase right (a "Right") on each
outstanding share of the Common Stock. On March 19, 1998, the Company's
Board of Directors declared a dividend of one Right for each outstanding
share of Common Stock, payable on April 2, 1998 to stockholders of record
on that date. Each Right entitles stockholders to buy 1/1000th of a share
of ENCAD Series A Junior Participating Preferred Stock at an exercise price
of $80, subject to adjustment. The Rights will become exercisable on the
close of business on the first day a person or group announces an
acquisition of 15% or more of the Common Stock or on the tenth day after a
person or a group commences or announces commencement of a tender offer,
the consummation of which would result in ownership by the person or group
of 15% or more of the Common Stock. The Company will be entitled to redeem
the Rights at $0.01 per Right at any time on or before the close of
business on the first date of a public announcement that a person has
acquired beneficial ownership of 15% or more of the Common Stock.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(in thousands, except percentages)

This discussion may contain forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in such forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risks and
Uncertainties" below. The Company undertakes no obligation to release publicly
the results of any revisions to these forward-looking statements to reflect
events or circumstances arising after the date hereof.

The following table sets forth, as a percentage of net sales, certain
consolidated statements of income data for the periods indicated. Except for
percentages, all other amounts are in thousands.

CONSOLIDATED STATEMENTS OF INCOME

THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
- ---------------------------------------------------------------------
Net sales 100.0% 100.0%
Cost of sales 62.2% 51.1%
- ---------------------------------------------------------------------
Gross profit 37.8% 48.9%
Marketing and selling 24.5% 16.2%
Research and development 11.1% 8.9%
General and administrative 11.0% 5.9%
- ---------------------------------------------------------------------
(Loss) income from operations (8.8%) 17.9%
Other income 4.3% -
Interest (expense) income - net (0.4%) 0.2%
- ---------------------------------------------------------------------
(Loss) income before income taxes (4.9%) 18.1%
Provision for income taxes (1.8%) 6.4%
- ---------------------------------------------------------------------
Net (loss) income (3.1%) 11.7%
- ---------------------------------------------------------------------

RESULTS OF OPERATIONS

NET SALES - ENCAD's net sales for the first quarter of 1998 decreased to
$23,517 down 25% compared to the same quarter in 1997. The decline in revenues
related to lower sales of printers as customers awaited several new product
announcements in the industry, and continued weakness in Asian markets. During
the first quarter of 1998, supplies sales increased 43% over the same period in
1997, and accounted for approximately 38% of net sales for the first quarter of
1998 versus 20% in the same quarter of 1997. Sales to the Company's numerous
original equipment manufacturers ("OEM") for the first quarter of 1998 accounted
for 25% of net sales as compared to 26% for the same period of 1997.

No one customer accounted for more than 10% of net sales during the first
quarter of 1998, whereas, one customer accounted for 16% during the first
quarter of 1997. International sales accounted for approximately 65% and 56% of
the Company's net sales during the quarters ended March 31, 1998 and 1997,
respectively.

COST OF SALES - Cost of sales includes costs related to product shipments,
including materials, labor, overhead and other direct or allocated costs
involved in the manufacture, warehousing, delivery, support and maintenance
of products. Cost of sales as a percentage of net sales stood at 62% and 51%
for the first quarter of 1998 and 1997, respectively. The Company experienced
lower gross profit margin percentages in the first quarter of 1998 compared
to the same period of 1997 due to lower average unit selling prices for
existing products and increased sales of supplies, which, in general, have
lower gross margins than the printer products. The Company's future success
will depend, in part, on its ability to develop and manufacture competitive
products and achieve cost reductions for its existing products.

MARKETING AND SELLING - Marketing and selling expenses were 25% of net
sales during the first quarter of 1998 compared to 16% during the same period
of 1997, which represents a 13% increase in absolute dollars. Most of the
increase was related to costs associated with increased staffing in the
Company's international offices and in the customer support organization.
Marketing and selling expenses are expected to continue to increase over
prior periods as the Company promotes its products and supports its marketing
and selling activities.

RESEARCH AND DEVELOPMENT - Research and development expenses, which can
vary depending upon product development cycles, were 11% of net sales during
the first quarter of 1998 compared to 9% during the same period of 1997 and
decreased by 7% in absolute dollars from the same period of 1997. Spending
in the first quarter of both years reflects costs for products anticipated to
be launched in the following quarter, however, spending was slightly lower in
the first quarter of 1998. The Company expects to continue to invest
significant resources in its strategic programs and enhancements to existing
products. The Company expects that research and development expenses will
continue to increase in absolute dollars as compared to prior periods.

GENERAL AND ADMINISTRATIVE - General and administrative expenses were 11%
of net sales during the first quarter of 1998 compared to 6% during the same
period of 1997 and increased by 39% in absolute dollars over the same period
of 1997. This increase was primarily due to higher staffing expenses
necessary to support an increased level of business and to increased reserves
for doubtful accounts receivable. The Company expects general and
administrative expenses will continue to increase in absolute dollars over
prior periods.

NET INTEREST - Net interest decreased to $100 expense during the first
quarter of 1998 from $64 income during the first quarter of 1997 due to less
cash available for external investment and increased borrowings under the
bank line of credit.

OTHER INCOME - Other income included payments received under a new product
development and manufacturing license agreement signed during the quarter.
Under this agreement, the Company is assisting in the development of a
wide-format color inkjet product targeted for markets outside of the
Company's mainstream graphics and textiles focus. The Company will receive
reimbursements for engineering expenses during the remainder of 1998 and
royalties on future product sales, if any.

PROVISION FOR INCOME TAXES - The Company's effective income tax rate
during the first quarter of 1998 was approximately 37%, compared to 35%
during the first quarter of 1997. The increase in the effective rate was
primarily because the loss prevented the Company from taking its normal tax
credit for its Foreign Sales Corporation.

NET LOSS/INCOME - Net loss was 3% of net sales for the first quarter of
1998 as compared to net income of 12% for the same period of 1997 and
decreased by $4,420 from the same period of 1997 for the reasons previously
described.

LIQUIDITY AND CAPITAL RESOURCES

The Company has historically funded its operations primarily through cash
flow provided from operations, however in the current quarter, the Company
utilized cash provided through its line of credit. At March 31, 1998, the
Company had cash and cash equivalents totaling $193, and working capital of
$47,023. In comparison, the Company had cash and cash equivalents totaling
$1,265, and working capital of $47,818 as of December 31, 1997. The decrease
in cash and cash equivalents was due primarily to an increase in inventories,
and decreases in payables and accrued expenses and other liabilities, offset
by decreases in accounts receivable.

The Company has received, and anticipates it will continue to receive, the
majority of its cash from collections of accounts receivable from its
distributors and OEMs. These groups have a history of timely payments;
however, an increasing amount of international sales can increase accounts
receivable balances due to traditionally slower payments by international
customers. At March 31, 1998, net accounts receivable decreased by $10,551
from $36,800 at December 31, 1997. The decrease was directly related to
lower sales in the first quarter of 1998 and the successful collection of
existing balances.

Inventory levels increased by $3,206 at March 31, 1998 from $29,155 at
December 31, 1997. This increase was primarily attributable to lower than
projected sales, increased inventories to support shorter lead times in
filling customer orders, and increased raw material inventories caused by
non-cancelable orders placed during the quarter.

During the quarters ended March 31, 1998 and 1997, the Company had capital
expenditures of $1,524 and $2,042, respectively. In the first quarter of
1998 the Company primarily incurred costs related to the implementation of an
enterprise-wide information system.

At March 31, 1998, the Company had available a $20 million revolving line
of credit. The line requires the Company to maintain certain financial
ratios. $5,910 was outstanding under the line at March 31, 1998 and $3,261 at
December 31, 1997. The line expires on January 2, 2000.

The Company's overall level of operating expense is expected to increase
due to the development and marketing of new products for existing and new
markets. Management believes that its existing cash and cash equivalents,
cash generated from operations, and funds available under the bank line of
credit will be sufficient to satisfy its currently anticipated working
capital needs. Actual cash requirements may vary from planned amounts,
depending on the timing of the launch and extent of acceptance of new
products. There can be no assurances that future cash requirements to fund
operations will not require the Company to seek additional capital, or that
such additional capital will be available when required on terms acceptable
to the Company. To date, inflation has not had a significant effect on the
Company's operating results.

The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "year 2000 problem"
is pervasive and complex as virtually every computer operation will be affected
in some way by the rollover of the two digit year value to 00. The issue is
whether computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. The
Company's recent enterprise-wide information system implementation, the initial
phase of which is expected to be completed in 1998, should mitigate most
internal problems as the system vendors have represented that these systems are
already year 2000 compliant. In addition, the Company is in the process of
communicating with others with whom it does significant business to determine
their year 2000 compliance readiness and the extent to which the Company is
vulnerable to any third party year 2000 issues. Management does not anticipate
that the Company will incur significant operating expenses or be required to
invest heavily in other computer systems improvements to be year

2000 compliant. The Company plans to devote the necessary resources to
resolve significant year 2000 issues in a timely manner; however, if the
Company, its customers, vendors or others with whom it does significant
business are unable to resolve external processing issues in a timely manner,
it could result in material adverse effect on certain of the Company's
operations.

RISKS AND UNCERTAINTIES

POTENTIAL FLUCTUATION IN QUARTERLY PERFORMANCE - The Company's quarterly
operating results can fluctuate significantly depending on factors such as
the timing of product announcements and subsequent introductions of products
by the Company and its competitors, availability and cost of components,
timing of shipments of the Company's products, mix of product families
shipped, market acceptance of new products, seasonality, currency
fluctuations, changes in prices by the Company and its competitors, and price
protection for selling price reductions offered to distributors and OEMs. In
addition, the timing of expenditures for staffing and related support costs,
advertising, trade show attendance, promotion, research and development
expenditures, and, of course, changes in general economic conditions can
impact quarterly performance. Any one of these factors could have a material
adverse effect on the Company's results of operations. The Company may
experience significant quarterly fluctuations in total revenues as well as
operating expenses with respect to future new product introductions. In
addition, the Company's component purchases, production and spending levels
are based upon forecast demand for the Company's products. Accordingly, any
inaccuracy in forecasting could adversely affect the Company's financial
condition and results of operations. Demand for the Company's products could
be adversely affected by a slowdown in the overall demand for computer
systems, printer products or digitally printed images. The Company's failure
to complete shipments during a quarter could have a material adverse effect
on the Company's results of operations. Quarterly results are not necessarily
indicative of future performance for any particular period, and there can be
no assurance that the Company can maintain the levels of revenue and
profitability experienced over the past several years on a quarterly or
annual basis.

On March 16, 1998, the Company announced that lower than anticipated
product sales, coupled with accelerated competitor-driven pressure on gross
profits for its flagship products, could generate operating results ranging
from break even to a loss for the first quarter of 1998 on sales
significantly lower than the same quarter last year. Due to the results for
the first quarter, the likelihood of continued sales weakness in Asia, lower
gross profit in its core business over the course of 1998, and increased
marketing and selling expenses required to respond to competitive pressures,
the Company also announced that it expects net income for the year will fall
well below comparable 1997 results, and that sales for full-year 1998 could
be only slightly higher or equal to 1997 sales.

HIGHLY COMPETITIVE INDUSTRY - The markets for the Company's
products, both printers and supplies, is highly competitive and rapidly
changing. Several new competitors have entered the market. The Company's
principal competitor is Hewlett-Packard, which dominates the CAD segment of
the wide-format inkjet markets and is the Company's principal competition in
the GA segment. In addition to direct competition in inkjet printers and
related supplies, the Company's products also face competition from other
technologies in the wide-format market. Such technologies include pen,
electrostatic and thermal methods. The competition to sell ink, media and
software products to the customer is also intense. Some of the Company's
current and prospective competitors, particularly Hewlett-Packard, have
significantly greater financial, technical, manufacturing and marketing
resources than the Company. The Company's ability to compete in the
wide-format inkjet market depends on a number of factors within and outside
its control, including the success and timing of product introductions by the
Company and its competitors, selling prices, product performance, product
distribution, marketing ability and customer support. A key element of the
Company's strategy is to provide competitively priced, quality products.
There can be no assurance that the Company's products will continue to be
competitively priced. The Company has reduced prices on many of its products
in the first quarter of

1998 and on certain products in the past and will likely continue to do so in
the future. Price reductions, while partially offset by similar reductions in
product costs, have affected gross margins and likely will continue to affect
gross margins and may adversely affect the Company's financial condition and
results of operations. See "Short Product Lives and Technological Change."

SHORT PRODUCT LIVES AND TECHNOLOGICAL CHANGE - The markets for wide-format
printers and related supplies are characterized by rapidly evolving
technology, frequent new product introductions and significant price
competition. Consequently, short product life cycles and reductions in unit
selling prices due to competitive pressures over the life of a product are
common. The Company's future success will depend on its ability to continue
to develop and manufacture competitive products and achieve cost reductions
for its existing products. In addition, the Company monitors new technology
developments and coordinates with suppliers, distributors and dealers to
enhance existing products and lower costs. Advances in technology will
require increased investment to maintain the Company's market position. The
Company's financial condition and results of operations could be adversely
affected if the Company is unable to develop and manufacture new, competitive
products in a timely manner.

DEVELOPING WIDE-FORMAT INKJET AND SUPPLIES MARKETS AND APPLICATIONS - The
markets for wide-format, color inkjet printers and related supplies are
relatively new and are still developing. The Company believes that there has
been growing market acceptance for inkjet printers and related supplies.
There can be no assurance that the markets and applications for wide-format
printers and related supplies will continue to grow. Other technologies are
constantly evolving and improving. There can be no assurance that products
based on these other technologies will not have a material adverse effect on
the demand for the Company's products.

FUTURE CAPITAL NEEDS - Although the Company first achieved profitability
on an annual basis in 1992, during the first quarter of 1998 it reported a
loss and there can be no assurance that future profitability or revenue
growth, if any, will continue on a quarterly or annual basis. Losses may
occur on a quarterly or annual basis for a number of reasons outside the
Company's control. See "Potential Fluctuation in Quarterly Performance."
The growth of the Company's business will require the commitment of
substantial capital resources. If funds are not available from operations,
the Company will need additional funds. The Company may seek such additional
funding through public and private financing, including debt or equity
financing. Adequate funds for these purposes, whether through financial
markets or from other sources, may not be available when needed or, if
available, not on terms acceptable to the Company. Insufficient funds may
require the Company to delay, reduce or eliminate some or all of its planned
activities.

DEPENDENCE ON KEY PERSONNEL - The success of the Company is dependent, in
part, on its ability to attract and retain qualified management and technical
personnel. Competition for such personnel is intense, and the inability to
attract additional key employees or the loss of one or more key employees
could adversely affect the Company. The Company does not have employment
agreements with senior management, nor does it maintain life insurance on
members of this group. There can be no assurance that the Company will
retain its key personnel. The Company relies heavily on industry consultants
and other specialists to assist and influence decisions, keep abreast of
technological and industry advances, and assist in other Company processes.
A delay in product introduction is possible to the extent key consultants
become unavailable.

COMPONENT AVAILABILITY AND COST; DEPENDENCE ON SINGLE SOURCES - While most
components are available locally from multiple vendors, certain components
used in the Company's products are only available from single sources.
Although the Company generally buys components under purchase orders and does
not have long-term agreements with its suppliers, it expects that its
suppliers will be able to continue to satisfy its requirements. The Company
has developed strategic relationships with

single suppliers of several of its components. Although alternate suppliers
are readily available for many of these components, for some components the
process of qualifying replacement suppliers, replacing tooling or ordering
and receiving replacement components could take several months and cause
substantial disruption to the Company's operations. The Company uses a
material requirements planning system that is intended to aid in making
"Just-in-Time" decisions; however, if a supplier is unable to meet the
Company's needs or supplies parts which the Company finds unacceptable, the
Company may not be able to meet production demands. Certain key components
of the Company's products are supplied indirectly by its principal
competitor, Hewlett-Packard. The Company believes that Hewlett-Packard
supplies these components to many other customers. Any significant increase
in component prices or decrease in component availability could have a
material adverse effect on the Company's financial condition and results of
operations.

POSSIBILITY OF CHALLENGE TO COMPANY'S PRODUCTS OR INTELLECTUAL PROPERTY
RIGHTS - From time to time, certain competitors, including Hewlett-Packard,
have asserted patent rights relevant to the Company's business. The Company
expects that this will continue. The Company carefully evaluates each
assertion relating to its products. If the Company is not successful in
establishing that asserted rights have not been violated, the Company could
be prohibited from marketing the products that incorporate such technology.
The Company could also incur substantial costs to redesign its products or to
defend any legal action taken against the Company. If the Company's products
should be found to infringe upon the intellectual property rights of others,
the Company could be enjoined from further infringement and be liable for any
damages. The Company relies on a combination of trade secret, copyright,
trademark and patent protection and non-disclosure agreements to protect its
proprietary rights. There can be no assurance, however, that the measures
adopted by the Company for the protection of its intellectual property will
be adequate to protect its interests, or that the Company's competitors will
not independently develop technologies that are substantially equivalent or
superior to the Company's technologies.

DEPENDENCE ON EXPORT SALES - For the first quarters of 1998 and 1997,
sales outside the United States represented approximately 65% and 56% of the
Company's net sales, respectively. The Company expects export sales to
continue to represent a significant portion of its sales. All of the
Company's products sold in the international markets are denominated in U.S.
dollars. An increase in the value of the U.S. dollar relative to foreign
currencies could make the Company's products less competitive in foreign
markets. International sales and operations may also be subject to risks
such as the imposition of governmental controls, export license requirements,
restrictions on the export of critical technology, currency exchange
fluctuations, political instability, trade restrictions, changes in tariffs,
difficulties in staffing and managing international operations and collecting
accounts receivable. In addition, the laws of certain countries do not
protect the Company's products and intellectual property rights to the same
extent as the laws of the United States. As the Company continues to expand
its international business, there can be no assurance that these factors will
not have an adverse effect on the Company's sales and, consequently, on the
Company's financial condition and results of operations.

RELIANCE ON INDIRECT DISTRIBUTION - The Company markets and sells its
products domestically and internationally primarily through specialty
distributors, dealers, VARs and OEMs. The Company's sales are principally
made through distributors which may carry competing product lines. Such
distributors could reduce or discontinue sales of the Company's products
which could have a material adverse effect on the Company's financial
condition and results of operations. There can be no assurance that these
independent distributors will devote the resources necessary to provide
effective sales and marketing support of the Company's products. In
addition, the Company is dependent upon the continued viability and financial
stability of these distributors, many of which are small organizations with
limited capital. These distributors, in turn, are substantially dependent on
general economic conditions and other unique factors affecting the
wide-format printer market. The Company

believes that its future growth and success will continue to depend in large
part upon its distribution channels. Although the Company believes that it
provides adequate allowances for bad debts which may arise from sales to
these customers, and, to date, has not experienced significant amounts of bad
debts, there can be no assurance that actual bad debts will not exceed
recorded allowances resulting in a material adverse effect on the Company's
financial condition and results of operations. To expand its distribution
channels, the Company has entered into select OEM and private label
arrangements that allow it to address specific market segments or geographic
areas. In order to prevent inventory write-downs, to the extent that OEM
and private label customers do not purchase products as anticipated, the
Company may need to convert such products to make them salable to other
customers.

MANAGEMENT OF GROWTH - Although net sales for the first quarter of 1998
have declined when compared to the first quarter of 1997, the Company had
previously experienced significant growth as net sales had increased to
$149.0 million in 1997 compared to $107.4 million in 1996 and $65.5 million
in 1995. Such growth has placed, and, if continued, will continue to place, a
significant strain on the Company's management, employees, systems and
operations. The Company's future operating results will depend on its
ability to continue to broaden the Company's senior management group,
attract, hire and retain skilled employees, and implement new and enhance
existing operational information and financial control systems. There can be
no assurance that any new personnel hired by the Company will be successfully
integrated into the business or that changes to the Company's systems will be
effective. The Company's inability to manage growth effectively could have a
material adverse effect on the Company's results of operations.

VOLATILITY OF STOCK PRICE - The market price of the Company's Common Stock
has fluctuated significantly since the Company's initial public offering in
December 1993. The Company believes that factors such as general stock
market trends, announcements of developments related to the Company's
business, fluctuations in the Company's operating results, general conditions
in the computer peripheral market and the markets served by the Company or in
the worldwide economy, a shortfall in revenue or earnings from securities
analysts' expectations, announcements of technological innovations or new
inkjet products or enhancements by the Company or its competitors,
developments in patents or other intellectual property rights and
developments in the Company's relationships with its customers and suppliers
could cause a further significant fluctuation in the price of the Company's
Common Stock. In addition, in recent years the stock market in general, and
the market for shares of technology stocks in particular, have experienced
extreme price fluctuations, which have often been unrelated to the operating
performance of affected companies. There can be no assurance that the market
price of the Company's Common Stock will not experience significant
fluctuations that are unrelated to the Company's operating performance.

ENTERPRISE-WIDE INFORMATION SYSTEM - The Company is in the process of
replacing its current management information system with a comprehensive
enterprise-wide information system and is devoting significant resources to
system and process design and system testing. The Company expects that this
system will allow it to realize significant operational efficiencies and
facilitate future growth. The Company's operations could be disrupted,
however, if the transition to the new system is not effected smoothly or if
the system does not perform as expected.

YEAR 2000 COMPLIANCE - The Company is aware of the issues associated with
the programming code in existing computer systems as the year 2000
approaches. The "year 2000 problem" is pervasive and complex as virtually
every computer operation will be affected in some way by the rollover of the
two digit year value to 00. The issue is whether computer systems will
properly recognize date sensitive information when the year changes to 2000.
Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail. The Company's recent
enterprise-wide information system implementation, the initial phase of which
is expected to be completed in 1998, should mitigate most internal problems
as the system vendors have represented that these systems

are already year 2000 compliant. In addition, the Company is in the process
of communicating with others with whom it does significant business to
determine their year 2000 compliance readiness and the extent to which the
Company is vulnerable to any third party year 2000 issues. Management does
not anticipate that the Company will incur significant operating expenses or
be required to invest heavily in other computer systems improvements to be
year 2000 compliant. The Company plans to devote the necessary resources to
resolve significant year 2000 issues in a timely manner; however, if the
Company, its customers, vendors or others with whom it does significant
business are unable to resolve external processing issues in a timely manner,
it could result in material adverse effect on certain of the Company's
operations.

ABSENCE OF DIVIDENDS - No cash dividends have been paid on the Company's
Common Stock to date and the Company does not anticipate paying cash
dividends in the foreseeable future.

ANTI-TAKEOVER EFFECT OF STOCKHOLDER RIGHTS PLAN AND CHARTER DOCUMENTS - In
March 1998, the Company's Board of Directors adopted a preferred stockholder
rights plan (the "Stockholder Rights Plan") which provides for a dividend
distribution of one preferred share purchase right (a "Right") on each
outstanding share of the Common Stock. On March 19, 1998, the Company's
Board of Directors declared a dividend of one Right for each outstanding
share of Common Stock, payable on April 2, 1998 to stockholders of record on
that date. Each Right entitles stockholders to buy 1/1000th of a share of
ENCAD Series A Junior Participating Preferred Stock at an exercise price of
$80, subject to adjustment. The Rights will become exercisable on the close
of business on the first day a person or group announces an acquisition of
15% or more of the Common Stock or on the tenth day after a person or a group
commences or announces commencement of a tender offer, the consummation of
which would result in ownership by the person or group of 15% or more of the
Common Stock. The Company will be entitled to redeem the Rights at $0.01 per
Right at any time on or before the close of business on the first date of a
public announcement that a person has acquired beneficial ownership of 15% or
more of the Common Stock.

ENCAD's Certificate of Incorporation requires that any action required or
permitted to be taken by the stockholders of ENCAD must be effected at a duly
called annual meeting or special meeting of stockholders and may not be
effected by any consent in writing. In addition, special meetings of
stockholders of ENCAD may only be called by the Board of Directors, the
Chairman of the Board or the President of ENCAD or by any person or persons
holding shares representing at least 10% of the outstanding Common Stock.
The Stockholder Rights Plan and other charter provisions may discourage
certain types of transactions involving an actual or potential change in
control of ENCAD, including transactions in which the stockholders might
otherwise receive a premium for their shares over then current market prices,
and may limit the ability of stockholders to approve transactions that they
may deem to be in their best interests. In addition, the Board of Directors
has the authority to fix the rights and preferences of and issue shares of
preferred stock, which may have the effect of delaying or preventing a change
in control of ENCAD without action by the stockholders.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

None

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 2. CHANGES IN SECURITIES

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

27 Summary Financial Data

(b) Reports on Form 8-K

1. Current Report on Form 8-K filed on January 16, 1998,
reporting the merger of ENCAD, Inc., a California
corporation ("ENCAD California"), into ENCAD, Inc., a
Delaware corporation, for the purpose of changing ENCAD
California's state of incorporation from California to
Delaware.

2. Current Report on Form 8-K filed on March 20, 1998,
reporting the adoption of a stockholder rights plan.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Dated: April 15, 1997

ENCAD, Inc.

(Registrant)

/s/ Todd W. Schmidt
------------------------------------------
(Todd W. Schmidt)
Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)